As industry strengthens, fewer U.S. banks failing

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Washington • U.S. banks are ending the year with their best profits since 2006 and fewer failures than at any time since the financial crisis struck in 2008. They're helping support an economy slowed by high unemployment, flat pay, sluggish manufacturing and anxious consumers.

As the economy heals from the worst downturn since the Great Depression, more people and businesses are taking out  and repaying  loans.

And for the first time since 2009, banks' earnings growth is being driven by higher revenue  a healthy trend. Banks had previously managed to boost earnings by putting aside less money for possible losses.

Signs of the industry's gains:

Banks are earning more. In the July-September quarter, the industry's earnings reached $37.6 billion, up from $35.3 billion a year earlier. It was the best showing since the July-September quarter of 2006, long before the financial meltdown. By contrast, at the depth of the Great Recession in the last quarter of 2008, the industry lost $32 billion.

Banks are lending a bit more freely. The value of loans to consumers rose 3.2 percent in the 12 months that ended Sept. 30 compared with the previous 12 months, according to data from the Federal Deposit Insurance Corp. More lending fuels more consumer spending, which drives roughly 70 percent of economic activity. At the same time, overall lending remains well below levels considered healthy over the long run.

Fewer banks are considered at risk of failure. In July through September, the number of banks on the FDIC's confidential "problem list" fell for a sixth straight quarter. These banks numbered 694 as of Sept. 30  9.6 percent of all federally insured banks. At its peak in the first quarter of 2011, the number of troubled banks was 888, or 11.7 percent of all federally insured institutions.

Bank failures have declined. In 2009, 140 failed (including two in Utah). In 2010, more banks failed  157  than in any year since the savings and loan crisis of the early 1990s (including three in Utah). In 2011, regulators closed 92 (including one in Utah). This year, the number of failures has trickled to 51. That's still more than normal. In a strong economy, an average of only four or five banks close annually. But the sharply reduced pace of closings shows sustained improvement.

Less threat of loan losses. The money banks had to set aside for possible losses fell 15 percent in the July-September quarter from a year earlier. Loan portfolios have strengthened as more customers have repaid on time. Losses have fallen for nine straight quarters. And the proportion of loans with payments overdue by 90 days or more has dropped for 10 straight quarters.

"We are definitely on the back end of this crisis," said Josh Siegel, CEO of Stonecastle Partners, a firm that invests in banks.

The biggest boost for banks is the gradually strengthening economy. Employers added nearly 1.7 million jobs in the first 11 months of 2012. More people employed mean more people and businesses can repay loans. And after better-than-expected economic news last week, some analysts said the economy could end up growing faster in the October-December quarter  and next year  than previously thought.

That assumes Congress and the White House can strike a budget deal to avert the "fiscal cliff"  the steep tax increases and spending cuts that are set to kick in Jan. 1. If they don't reach a deal, those measures would significantly weaken the economy.

Banks have also been boosted by higher capital, their cushion against risk. Banks increased capital 3.8 percent in the third quarter, FDIC data show. And the industry's average ratio of capital to assets reached a record high.

On the other hand, many banks are no longer benefiting from record-low interest rates. They still pay almost nothing to depositors and on money borrowed from other banks or the government. But steadily lower rates on loans other than credit cards have reduced how much banks earn.

"This interest-rate pressure on the banks becomes very difficult to overcome," said Fred Cannon, chief equity strategist and director of research at Keefe, Bruyette & Woods. "It's a big headwind for banks."

Many banks have reported lower net interest margin  the difference between the income they receive from loans and the interest they pay depositors and other lenders. It's a key measure of a bank's profitability.

The industry's average net interest margin fell to 3.43 percent in the third quarter from 3.56 percent a year earlier.

Some big banks have also cautioned that their earnings are up mainly because they've shed jobs, bad loans and weak businesses rather than because of an improved economy. They include JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. All managed to recover from the financial crisis in part because of federal aid.

Small and midsized banks have taken longer to rebound. They held risky commercial real estate loans used to develop malls, industrial sites and apartment buildings. Many such loans weren't repaid. But as the economy has strengthened, fewer such loans have soured, and many small and medium-size banks have recovered.

For example, at M&T Bank Corp., a regional institution based in Buffalo, N.Y., net income soared in the third quarter. M&T attributed its gain to reduced loan losses and higher mortgage revenue. The bank repaid the remaining $381 million of the $600 million in bailout aid it had received during the crisis.

Many banks complain they've been hampered by new regulations, especially stricter requirements for the capital they must hold to protect against unexpected losses. Rules enacted after the crisis have compelled some banks to move more capital into reserves and reduce the amount available to lend.

Some of the biggest banks say their customers have held off on borrowing in part because of slower global growth and concern about the "fiscal cliff." 

Utah bank failures  a look back

Although there were no bank closings in Utah in 2012, six have been shut down by state and federal regulators since the beginning of the Great Recession in late 2007:

Magnet Bank  January 2009

America West Bank  May 2009

Barnes Bank  January 2010

Centennial Bank  March 2010

Advanta Bank  March 2010

Sunfirst Bank  November 2011

Source: Utah Department of Financial Institutions

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